Question

A bond has a $1,000 par value, ten years to maturity, and pays a coupon of 6.0% per year, semiannually. If the bond’s required return is 5.7% per year, what is its current yield?

Question 5 options:

A)

5.87%

B)

5.76%

C)

5.82%

D)

6.00%

E)

5.94%

Answer 1

Calculation of Market Price of bond:

Semi annual coupon = 1000*6%*6/12 = 30

Time to maturity = 10*2 = 20 years

(Since it is semi annual coupon bond, coupon will be paid twice in a year and hence time to maturity is multiplied with 2)

Discount rate (semi annual) = 5.7%/2 = 2.85%

Particulars	Years	Cash flows (1)	Discount rate @2.85% (2)	Discounted Cash flows (3) (1*2)
Interest	1-20	30	15.085	452.55
Principal	20	1000	0.570	570
			Market price of bond	1022.55

Annual coupon = 1000*6% = 60

Current yield = Annual Coupon/Market price of bond*100

= 60/1022.55*100

= 5.87%

Current yield = 5.87%

Answer: 5.87% (A)